5/20/2009 @ 1:00PM

Bad Timing For Dubai, Abu Dhabi

Considering confidence is in short supply, Dubai and the United Arab Emirates are not showing their best side to investors. On Monday, Dubai mysteriously booted out its respected finance chief, Nasser al-Sheikh, suggesting deep divisions at the top as the emirate tries to repair its balance sheet. And on Wednesday, after Dubai tried to soothe worries over the departure, the United Arab Emirates’ capital of Abu Dhabi pulled out of the planned monetary union between the six members of the Gulf Co-operation Council.

Although there was no official reason given for either decision, both moves had the whiff of petty politics rather than economic necessity. Al-Sheikh has been a key figure in Dubai since the market meltdown hit last September, making honest appraisals of the emirate’s troubles, helping to draft the expenditure-heavy 2009 budget and overseeing the $10 million bond sale to Abu Dhabi earlier this year. According to Christopher Davidson, an academic and author of several books on the U.A.E., al-Sheikh may have upset conservatives in the corridors of power, and paid the price–despite the harm to investor confidence.

As for the decision of the U.A.E. to turn its back on monetary union with Saudi Arabia, Kuwait, Qatar, Oman and Bahrain–a union touted as Middle East’s answer to the euro–a petty dispute may also have been responsible. Earlier this month, the six-member G.C.C. decided to base the union’s planned monetary council and central bank in Riyadh, the Saudi capital, despite reportedly heavy lobbying from the U.A.E. to locate it in Abu Dhabi. (See “Gulf Unity In Tatters.”)

Since Monday, the Abu Dhabi ADX index has ticked up 0.8%, while the Dubai DFX index has gained 1.0%. Over in Europe, meanwhile, the Dow Jones Euro Stoxx 50 index has made gains of almost 5.0% in the same period. It’s a familiar pattern: Since March, European and American stocks have soared, but the lack of green shoots in Dubai has kept the U.A.E. virtually rally-free. (See “No Rally In Dubai.”)

Although the U.A.E. certainly has legitimate reasons to feel aggrieved over Saudi Arabia’s dominance of the planned G.C.C. union, particularly given the history of territorial and political squabbles between the two, the urgency of the world recession has made it a bad time for political divisions to start coming to the fore. And given the sorry state of Dubai’s real-estate and construction industries, following a boom that lasted years, al-Sheikh’s replacement will also have to quickly demonstrate that he is not going to put politics before harsh economic reality.